After the 'License Raj': Economic Liberalization and Aggregate Private Investment in India

Abstract

Using three alternative models that incorporate the behavior of both credit constrained and unconstrained firms in a theoretically consistent manner, this paper presents evidence on the effects of economic liberalization of 1991 on aggregate private investment in India. Two robust conclusions emerge from the estimation of the investment function by ARDL approach. First, the response of private investment with respect to the relative cost of capital has increased at least 4.6 times after the dismantling of the 'License Raj'. Second, the evidence implies a significant improvement in the technological efficiency of the firms during the post-liberalization period. In contrast, no robust conclusion can be drawn about the severity of the credit constraint faced by the private sector following the liberalization.